~ Investment Strategy

Macro Diary

Janet Yellen gave a talk yesterday in which she mentioned a number of labour-market indicators that she considered useful: the unemployment rates, the growth in non-farm payrolls, the hiring rate, the job-quitting rate, and overall spending and growth in the economy. I have already made a composite index to represent the outlook for the labour market (the Fed having said that asset purchases will continue at least until the outlook improves substantially) which combines the unemployment rate, the employment/population ratio, the change in non-farm payrolls, weekly initial jobless claims and economic forecasters’ forecast for economic growth for the year ahead. I think I will make a new index based on Yellen’s indicators.

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Here is something to worry about: my short-equity thesis could be undermined if monetary policy is beginning to have more of an effect. What should that happen? Because the housing market appears to be recovering, and that could increase the importance of the housing channel for the transmission on monetary policy to the economy.

However, I am not too worried. First, the transmission channel has always been there: the fact that homeowners have been able to refinance with cheaper mortgages, and that new buyers have been able to obtain cheap mortgages, means that monetary policy has already had some effect. Second, the US economy is still in the late stages of deleveraging (the growth of household liabilities is around 0% YOY). And third, equities are not GDP futures; margins are already very high, and I wonder how much further they will be able to grow even if GDP growth is relatively strong. There is only a weak positive relationship between earnings growth and GDP growth.

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It seems that private-sector credit actually fell in the latest release for the UK. This has prompted much talk about whether or not the “funding for lending” scheme is working — it was supposed to lead to an increase in private-sector credit of £10bn, but so far banks have drawn down only £13.8bn of funding, including £9.5bn in Q4 2012. I have been sceptical of this programme from the start. I admit that I have forgotten its details; it is pretty complicated. But fundamentally, it assumes that the problem is a lack of credit supply. Well, there may be an element of that, but I think that a lack of credit demand is the most important reason for poor credit growth in the UK, and that that in turn is the result of the weak economy.

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Wen Jiabao has announced China’s growth and inflation targets for this year, in his last act as premier. The National Development and Reform Commission also published some targets and forecasts. The targets were as follows (with previous targets in brackets):

Wen also reiterated China’s intention of moving to more market-based determination of interest and exchange rates, and warned of continued inflationary pressures from land and labour costs and monetary easing in developed countries.

Why is China loosening fiscal policy while maintaining relatively tight monetary policy? Perhaps it is trying to stimulate growth while keeping inflationary pressures under control; or perhaps it is trying to rein in local governments’ use of credit while expanding central-government spending to compensate; or perhaps it is trying to stimulate the economy while preventing asset-price appreciation that could result in riches for the few and therefore be socially destabilising. I suspect there are elements of all three alternatives in the authorities’ thinking.

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The RBA held rates, saying the policy was appropriate. This is consistent with my model of its current behaviour, which is based on a combination of inflation expectations and non-mining employment.